Monday, September 23, 2019

Restructuring support agreement for Puerto Rico power company reached

By on May 6, 2019

The Puerto Rico Electric Power Authority’s headquarters in San Juan (CB file)

Expected to reduce certain Prepa debt by up to 32.5%

SAN JUAN – Puerto Rico’s Financial Oversight and Management Board, Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) and Electric Power Authority (Prepa) reached a restructuring support agreement Friday with holders of 51% of the public utility’s revenue bonds.

The announcement was made by Aafaf Director Christian Sobrino and Prepa Executive Director José Ortiz. Sobrino said the agreement was reached with Assured Guaranty, which holds 11% of Prepa’s bonds and the Ad Hoc of Prepa Bondholders, which holds 51% of the power corporation’s unsecured bonds and 40% of all bonds. Syncora and National Public Finance, two monoline bond insurers that are seeking to have Prepa placed in receivership, and fuel line lenders are not part of the agreement.

“The rest of the bondholders are expected to join the agreement,” Sobrino said, noting that when the Government Development Bank reached an RSA, it only had 40% of the creditors and two weeks later, it had 60%.

Under the support agreement, the bondholders will exchange their existing power revenue bonds for two types of securitization. Series A bonds will comprise about 67.5% of the value of the existing bonds while Series B bonds will be “growth bonds,” linked to economic recovery of Puerto Rico and the repayment of the Series A bonds.

“It is possible that the Series B bonds do not receive any repayment if the electricity demand is lower than projected in the fiscal plan and the bonds could be paid in full if the electricity is higher than projected,” Sobrino said.

The terms of the agreement also establish that the repayment of the bonds will be backed by a fixed transition charge on customer’s electric service bill, meaning it will not vary with the fluctuation of Prepa sales.

The transition charge will start at 1 cent per kilowatt-hour (kWh) in July, increasing to 2.768 cents per kWh upon closing and increasing thereafter to 4.552 cents per kWh during the 40-year stated final maturity of the bonds.

“We expect to be able to reduce with savings costs by 5 cents per kilowatt hour to accommodate the charge,” Ortiz said. Electric power rate the island is expected to cost, on average, 22 cents per kWh.

The financial oversight board said the fixed transition charge “is a measure for protecting PREPA’s customers from potentially larger rate increases in the future,” and that if “ratepayers had to pay PREPA’s full contractual debt service when due, the current rate would be considerably higher.”

However, the consumer representative on Prepa’ board, Tomas Torres, said Monday that he voted against the restructuring agreement because he believes it would increase rates substantially.

In a statement, Torres said the agreement is questionable, given it does not include “studies and economic analyses that validate it.”

In addition, he said, “any evaluation of the effect of the agreement must be carried out considering all the other obligations of PREPA, which, as described in public documents such as the Integrated Resource Plan (IRP), could have an effect of an increase in the rate of up to 6.2 cents / KWh which is equivalent to 28% of the current rate.”

He further said: “If this value is added to the current average rate of 22 cents / Kwh, the average rate would be 28.2 cents / KWh. Even if PREPA is successful in the proposed implementation measures included in the IRP, during the 20-year plan period, rates are projected at about 25 cents / Kwh. Mainly for these reasons, among others which we detail in our explanatory dissident vote, the approval of this agreement by the Board of Government of the PREPA did not count on our support as representative of the consumers.”

Torres called for the Prepa governing board to publish the resolution on the approval of the agreement, including its explanatory dissident vote, as soon as possible, to publicly inform the “transformation processes and as part of one of the most important decisions–if not the most important–in the history of PREPA, with a direct effect on consumers.”

Without the RSA, Puerto Rico would be paying $7 billion in debt over the next 10 years. Under a previous RSA, which was negotiated by AlixPartners, it would have paid $6.25 billion over 10 years but under the RSA announced Friday, the amount would be reduced to $3.2 billion over 10 years, Sobrino said.

Prepa has about $8.3 billion in outstanding principal bond debt. About 2.25% of the principal bonded debt is secured and the rest is unsecured. Bondholders have not been paid since 2015. The utility also has $3 billion in underfunded pension obligations and $700 million in credit lines with fuel lenders. There is also $52 million in two interest rate swap programs.

“In the discussion of Prepa, we only focus on bonds and we do not take into consideration that there are numerous obligations and that in order to leave bankruptcy, we have to deal with all of them,” Sobrino said.

Other unsecured liabilities include prepetition accounts payable, obligations under collective bargaining agreements, and contingency obligations. The debt adjustment plan needs to include payments for professional services and debt that has been accruing since Prepa filed for bankruptcy in 2017.

The process to restructure Prepa’s debt began in 2015. The public utility reached an RSA that would have cut the debt by 15% but was rejected in 2017 by the financial oversight board, which then initiated that year the bankruptcy-like re-structuring proceedings under the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa). Prepa reached a preliminary restructuring support agreement last summer.

Privatization ahead

Prepa is advancing privatization efforts with the help of Aafaf and the island’s Public-Private Partnerships Authority. There are four companies vying to obtain a concession to run the transmission and distribution system, Ortiz said Friday.

“The agreement is a significant step forward in getting Prepa out of bankruptcy court,” Ortiz added.

The agreement does not contemplate bondholders providing funding for capital works as in the RSA reached in 2016, and Ortiz said he does not foresee going back to the markets for a while but expects to be able to carry out the utility’s needed repairs with federal disaster-recovery funds.

The agreement requires the approval of the U.S. District Court for the District of Puerto Rico.

“We are moving forward with the negotiations for a plan of adjustment that would be the foundation for a new PREPA, as a privately operated, financially healthy electricity company able to attract investors and provide the people of Puerto Rico with better, less costly and more reliable electricity” Chairman José Carrión said in the fiscal board’s announcing release.

A redacted version of the RSA made available by the fiscal board can be seen here:

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